Term Insurance vs Whole Life Insurance

When selecting a life insurance policy, a starting point is to weigh the advantages and disadvantages of term insurance vs whole life insurance policies. Your monthly financial resources and the time frame for which you want coverage are a couple factors that will determine which type of policy makes better sense for you. For example, if you’re looking for a policy for 20 years or longer, whole life may be the way to go. If, however, you want less than 10 years' coverage (until your children graduate college, for example), perhaps term life insurance is best.

Term Insurance Basic Facts

Term life insurance carries the lowest possible rates, much lower than for whole life insurance. It’s convenient, the policy is easier to understand, and it can be purchased for terms that range from 1 to 20 years. Longer terms (5 to 20 years) can also be purchased, with higher premiums. Longer term life insurance policies also feature a flat rate death benefit and eligibility that’s guaranteed.

The most common form of term insurance is the annual policy. You pay an annual renewal that increases every year, or you may have a premium that remains the same for a fixed number of years. Most term life insurance policies have current payment and maximum rates per year. The insurer may opt to increase premiums in order to recover costs. Term life insurance can serve the needs of individuals who simply want extra coverage for a set period or who want to supplement coverage they have through their employers.

Other insurers offering term life coverage have health requirements at age thresholds. You may need to prove you’re still in good health to keep your lower premiums. Usually, a term life insurance policy can be converted to a whole life policy without evidence of good health.

Another key difference between term and whole life insurance is that term insurance coverage provides death benefits only-there’s no money back if your life extends beyond the term of your policy. Term life is often referred to as a “value” policy. You’re paying for only the death benefit, which is in effect
only for a fixed period (the length of your term). You may also opt for a very high death benefit (for example, if you have young children completely dependent on your income). Term life insurance could provide this coverage in conjunction with a whole life policy that carries a smaller death benefit.

Whole Life Insurance Basic Facts

You pay higher premiums for a whole life insurance policy. In fact, the premiums for a whole life policy are estimated to be anywhere from 5 to 10 times more expensive than for term insurance. But you may avoid taxes that could be a burden to your beneficiaries upon your death. Think of a whole life insurance policy as a combination of a death benefit with a savings account (cash value). If you live, you can get some of the premiums you paid back by either cashing in the policy or borrowing against it. Your gains are tax-deferred if you cash in while you live and usually are tax-free to your beneficiaries when you die.

There are three types of whole life policies, traditional whole life, universal whole life and variable whole life. Traditional offers the most guarantees: a guaranteed premium, minimum guaranteed cash values and death benefits. Universal is more flexible, with premiums that may vary, maximum guaranteed premiums, minimum guaranteed cash values and death benefits. Variable is for the higher-risk investor and offers required guaranteed annual premiums and a minimum death benefit that’s guaranteed. However, there’s no guaranteed cash value, and you have to choose your own investments for your policy-typically, in mutual funds that range from money market accounts to aggressive growth funds.

When considering whether to purchase term or whole life insurance, bear in mind that whole life insurance is often used in estate planning and is perhaps best suited for people who can afford the higher premiums. The main benefit of whole life over term life is the liquidity of the policy’s assets. Holders of whole life insurance policies can borrow, invest or withdraw from the policy’s cash value.
blog comments powered by Disqus